Not Yet Ready for a long-term Solution - Weekly Blog # 936

 

 

 

Mike Lipper’s Monday Morning Musings

 

Not Yet Ready for a long-term Solution

  

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Preface

I was hoping to start a series of blogs on the selection of smart securities investment strategies for multi-generational ownership. Unfortunately, the current data does not lead to a positive view. The breakdown of the twenty-hour cease fire negotiation with the Iranians confirms that this was a week of data confusion. The historical odds were against progress in the search for political and economic solutions.

 

Our Side

The investment mode for the week is captured by the changes in the American Association of Individual Investors (AAII) sample survey of the next six month’s market outlook. The bullish outlook improved slightly to 35.7% from 33.6% the prior week, a gain of 2.1% in a not highly disciplined survey. What is perhaps a little more insightful is a drop in the bearish measure to 43.0% from 51.4%, a decline of 8.4 %. During the survey week, many pundits were enthused about the forthcoming ceasefire meeting. (I expect Sunday morning’s announcement of a failure to get an agreement will materially impact this coming week’s results.)

 

The two largest stock market exchanges reflected different views, with only 31% of NYSE stocks falling vs 53% of NASDAQ stocks declining. (The NASDAQ market has younger, more speculative companies, with a larger number of companies reporting losses, including some private debt funds.)

 

Consumer sentiment was reported to be lowest in 70 years. Moody’s (*) raised the chance of a recession in the next 12 months to 48.6%. One of their executives is quoted as saying “we could already be in a recession”. 

(*) Owned in managed accounts.

 

Iranians’ View

The first thing to remember is that Iran is the modern name for Persia, which was the dominant political/military power in the Middle East for hundreds of years. Persia was briefly lost to Alexander the Great and later to the Ottomans but was never effectively occupied by foreign forces.

 

The current view of the Iranians is that Trump is losing this war. He is driven to achieve a quick victory to guarantee a positive mid-term election this year, at least in the House. The Iranians are believers in the German strategist Carl von Clausewitz’s statement that “war is an instrument of policy by other means”. Our President went to a military high school, but I believe he at best learned infantry tactics, not strategy. He did not participate in the ROTC at University of Pennsylvania. The current Secretary of War did not have any professional exposure at West Point or VMI and thus was not schooled in strategy. One of Clausewitz’s beliefs was getting the other side to give up the will to fight. Unfortunately, since WWII the US has won wars but lost the peace in getting their opponent to give up the willingness to fight. The last time we achieved it was through the Marshal Plan, named after General George Marshal a graduate of VMI who rebuilt the industrial strength of Germany.

 

While the potential for nuclear warfare was a concern, the far greater risk to the US, Britain, Europe, Mid East, Africa, Latin America, and Asia were already active sleeper cells. At this point we have not yet organized an effective counterforce.

 

It is no wonder the weekend discussions did not produce positive results. Consequently, it may be too early to invest new long-term money.

 

These are controversial views. Please exchange your thoughts. I am always a student and need to learn.

                                        

 

 

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Reading the Future from History - Weekly Blog # 863

 

 

 

Mike Lipper’s Monday Morning Musings

 

Reading the Future from History

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

History May Suggest:

1. The American People Won the Election
2. The Recession has started

 

The Declaration of Independence was signed on August 2nd, 1776, the US Constitution was passed in 1787, and the last state (Rhode Island) ratified it in 1790. Today, Rhode Island still remains the smallest state in the Union. Thus, since the beginning of our nation the rights of our smallest state have been critical to our progress. One of the many things making the US different than other republics is The Founding Fathers fear of the tyranny of the larger states on the smaller states. Consequently, our Electoral College favors state representation over population. In the 2024 election, even though President Trump polled more votes than Vice President Harris, the House is almost evenly split, but he won 36 states and lost only 14, mostly on the coasts or major rivers.

 

This split is one reason I suggested President Trump will likely have difficulty getting much legislation easily passed through both houses, where he only has a majority of about five votes. Of the 14 major issues, only two can be accomplished through just executive orders.

 

Actually, many if not most Americans are pleased with the results of the election. An incompetent government was dismissed before it became even more intrusive and has been replaced by a new administration with untried ideas. New legislation will be delayed by a disruptive Congress and a slow-walking Deep State. Many Americans would like it if the air conditioners in D.C. did not work, fulfilling Hamilton and Madison desire that government work be part-time.

 

Recession Coming?

As someone rowing in a boat with the wind picking up and clouds darkening, you become relatively certain it will soon rain. The question is, will you get to dry land before getting really wet?

 

Evidence of an economic storm on the horizon can be summed up as follows:

1. Stock analysts have been instructed for generations that high quality bonds are more sensitive to economic changes than stocks, at least initially. Currently, yields have been going up (prices down). However, mid-quality bond prices have barely moved at all, something overseas fixed income investors are very sensitive to.
2. Most US stock prices declined this week, with just 37.7% of the stocks on the NYSE rising and only 27.6% rising on the NASDAQ. NASDAQ stocks have performed better than those on the “Big Board” for some time and are cheaper on a market to book value basis. This suggests the NASDAQ investor is a more professional investor.
3. The American Association of Individual Investors (AAII) weekly sample survey of investors indicates the bullish or bearishness sentiment of their investors for the next six months. In the last three weeks, the bullish reading has risen to 49.8% from 39.5%, while the bearish reading only went down to 28.3% from 30.9%. Market analysts believe the “public” is often wrong at turning points. With that in mind, it is interesting that the bulls gained 10.3% while the bears dropped only 2.2%.
4. The weekend WSJ tracks some 72 prices of stock indices, commodities, ETFs, and currencies. This week only 12.5% were up, with Natural Gas up a leading 5.77%. The remaining gainers all rose by less than 2%. This likely indicates sophisticated investors are nervous about what lies ahead.

 

 

Thoughts?

 

 

 

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Mike Lipper's Blog: Inflection Point: “Trump Trade” at Risk - Weekly Blog # 862

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Detective Work of Analysts - Weekly Blog # 847

 

         

Mike Lipper’s Monday Morning Musings

Detective Work of Analysts

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

Similarities

Good professional securities analysts are not captives of media pundits or most salespeople. They often build their analyses using small details from obscure sources. This is the approach I use each week in preparing the blog. I gather bits of information for a myriad of sources to build a collection of factoids, some of which may be true and useful.

 

What follows is this week’s collection, separated into come-to-mind file folders which are easy to discard.

 

Market Clues

Citigroup regularly produces market judgements that rely on their own data and other indicators. Most interesting to me is their prediction for specific dates a year in the future. They also study their past guesses and claim to be accurate 80% of the time. This is surprising!

 

As has been noted several times in these blogs, I learned analysis at the New York racetracks where the favorites win about half the time, pre-tax and pre-expenses. In my study of professional securities analysts touting their records when seeking employment, their lifetime success ratios are rarely in the mid-60s% when adjusted for appropriate expenses and taxes. There are a number that have very commendable records because they hold winning combinations for a long time, keeping their investments at work.

 

This adjustment to performance data is critical in comparing investment returns. Quite a number of investment returns in the second quarter were single digit results. However, many investors look only at longer returns where results are generally positive.

 

Misreading Performance Data

Like many analysts I look at the weekly summary survey data from the American Association of Individual Investors (AAII). They survey their members to get their market outlook for the next six months, indicating whether they are bullish, bearish, or neutral. This latest week 43.2% were bullish and 31.7% were bearish. This satisfied the bulls and other pundits. The week prior the bullish count was 52.7% and the bearish count was 23.4%. Comparing the two weeks I see a flashing yellow caution light. Professional market analysts consider any reading over 50% unsustainable, but of real concern was the unnerving 29.3% spread between the bulls and bears. The spread for the current week was a little more normal at 11.5%.

 

The decline in the bull/bear spread may be a fluke, or a meaningful signal that the bulls were too enthusiastic. The political news may have created the flip. Chatting with institutional investors, they believe the election is not yet a significant enough factor to cause a change in investment exposure.

 

One of the rising stock groups has been the banks who expect their “NIM” (Net Investment Margin) to be higher in 2025, either because of lower rates increasing demand for loans, or rates being higher and loan demand being enforced.

 

Why Are Interest so High?

No one wants to accept the responsibility for interest rates, not the executive branch nor Congress. Washington plays the game of taking credit for “good things” and avoids being tagged with “bad things”. A number of years ago Congress was able to shift responsibility to the Federal Reserve via its Second Mandate of controlling the level of prices using short-term interest rates, their major weapon. These rates are part of the cost package individuals and companies must deal with. The Fed does not control labor costs, quantities, quality, global trade, or the rate of innovation and invention. The partnership of the Executive and The Executive and Congress control these items, with only the Supreme Court beyond. This partnership has managed these factors since colonial times, particularly at election time. COVID proved to be an excellent time to target the expected vote with money, paying little attention to the inflationary impacts of excess money creation.

 

Tariffs as a Tax Collector

The founding fathers did not have an efficient way to get money to pay for their   war and peace expenses. They adopted the European approach of raising money through tariffs and paid their bills this way for many years. Later, the Internal Revenue Service was able to collect income taxes. By the 1920s tariffs were a less important part of government. Farmers, businesses, and people borrowed money in the twenties, creating high spending and debt. Herbert Hoover, a conservative President, was talked into signing the Smoot-Hawley Tariff, which hurt the sales of farm goods and damaged farmers and farm focused banks. This led to other countries going into depressions and was a cause of WWI. As both presidential candidates display a lack of understanding of economics, we could well repeat the global problems of the 1930s.

 

What One Can Learn from Chocolate?

One of the repeated lessons from Chocolate is that European commodity players like trading Cocoa because of its low margin requirements and high fluctuations. The players periodically got wiped out and attempted to recoup their losses in the coffee market, which is bigger.

 

With that as a background and my unintended ownership in Nestle, I was fascinated by their management accounting. They developed an approach where they created “Real Internal Growth” (RIG). This number excludes price changes and interest rate fluctuations in determining real demand for their products. Currently, they see a shift in demand to cheaper lines for both chocolate products and pet food. (Walmart and Amazon have noted similar consumer reactions.)

 

Working Conclusion:

The financial world is seeing a different future than the real world of the consumer.

 

 

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Mike Lipper's Blog: Our Self-Appointed Mission - Weekly Blog # 846

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What Do Single Digits Mean? - Weekly Blog # 799

 

Mike Lipper’s Monday Morning Musings

What Do Single Digits Mean?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

  

 

Rates of Change vs Available Time

Politicians have an advantage over us mere mortals, they know the exact terminal date of their efforts. That is, the day after their election is all important. Remember, the administrative state is largely dependent on the whims of political leadership, so it helps to focus on them for predictions as to the future. For example, there is increasing evidence that the Federal Reserve is split between those favoring preservation of happy economic feelings and those trying to preserve the economic well-being of the economy. That is how I read the Chairman’s speech from Jackson Hole. The Federal Reserve Chair is attempting to guide a split board toward focusing on the survival of the present economic system rather than generating “bribe money” for the next election. That is why the betting odds suggest we may not see meaningful change until after election night. Supporting this view is Cumberland Advisors headline “Higher, longer? Nope. Lower, soon? Nope. Same for 2 years? Yup!

 

I have come to the same conclusion as David Kotok, Chair of Cumberland Advisors, although I use two very different approaches. Bad history repeats and the actuarial analysis of past results by excluding extremes.

 

The current occasional resident of the White House, Delaware, and other hideouts is a well-known fan of FDR. He has followed the prescription of never letting a problem escape other desired solutions. FDR took advantage of excessively lose credit controls to change a recession into a depression, attempting to override The Constitution. The period resulting from stagflation lasted until the beginning of the US involvement in a World War. FDR was bailed out by the Axis reacting to his actions. (Among them were a ban on oil sales to Japan and the refusal to let a ship full of immigrants trying to escape Hitler’s Europe land in the U.S., among other things.)

 

At one point in the history of Prudential Insurance, the little known but politically powerful executive was the chief actuary. This was supported by their board and also occurred at other surviving insurance companies. The power of the actuary was in setting the rates charged for insurance. During a brief conversation with him, he revealed that he focused on experiences to set rates. (Similar to handicapping horse races and securities analysis.) This was not a mechanical exercise, the actuary decided how events would be weighted and which events would be ignored. In a similar fashion, I look at recent mutual fund performance to project the most likely future performance of the average mutual fund when properly positioned within comparable funds.

 

The Pandemic, Beginning or End of Period

Using an actuarial approach to study mutual fund performance history back to the 1960s. One can roughly classify the period from 1957 through 1968 as expansion, and the next period until the mid-1980s as excessive expansion. This led to another period of stagflation, which was followed by another period of expansion until the second decade of this century. A market decline and a good bull market then followed.

 

The pandemic started in 2019 and lasted largely through 2022, a period of excessive funding to buy votes. It is this history that allows me to use an actuarial approach to downgrade performance history prior to 2020. This is why in the next section I will attempt to guess future mutual fund median performance beginning with the prior peak to current levels.

 

What Will Average Fund Performance Be?

The following analysis is more of a future scouting report than an exact prediction. To be successful I hope it is largely correct in terms of long-term direction and close in terms of actual results. Although it is possibly too conservative. The following table utilizes data from the London Stock Exchange Group, the current publisher of the “Lipper “data.

 

   Change in Total Reinvested Return

               Year   13 Weeks   2/19/20

                to        to       to

Fund Type      --------8/24/23----------  

Large-Cap

Cap Weighted   15.10    4.29      6.76

Median          9.09    2.93      5.00

Difference     -6.01   -1.36     -1.76

 

Mid-Cap

Cap Weighted     7.29    4.57     4.36

Median           7.17    4.30     4.31

Difference      -0.12   -0.27    -0.05

 

Small-Cap

Cap Weighted     6.36    5.02     4.78

Median           7.17    4.15     4.31

Difference      +0.81   -0.87    -0.47

 

 

“Value”

Cap Weighted     5.30    4.72     6.49

Median           7.46    2.99     5.81

Difference      +2.16   -1.73    -0.98

 

“Growth

Cap Weighted    15.07    3.77     5.01

Median           8.76    3.02     3.63

Difference      +6.31   -0.75    -1.38

 

                                        

Analysis

1. There are only two differences over 5% and both relate to the “magnificent seven” performance of seven growth stocks. This is significant, unusual, and unlikely to be repeated in the long-term future. Notice a narrowing difference in the last 13 weeks and a slower rate of change from the last peak.
2. In the current market, larger funds are performing better than the median in their fund class. The difference is probably due to stock selection and possibly lower expenses/transaction costs. However, the heavyweight advantage is within the range of mistakes we increasingly find within society.
3. Our focus is to try to find the middle for portfolio management purposes. I am extremely aware that the “magnificent seven” are up +93% and regional banks are down -37%. As a contrarian looking for long-shots I suspect some regional banks will perform better than some of the “magnificent seven” in the future.
4. One message from the Chairman’s speech at Jackson Hole is the expectation of lower than present overall growth. This would tie with stagflation over the next two years.
5. Long-term, those in lower tax brackets could get hurt by higher inflation caused by labor costs and tariffs hurting consumption.
6. If the NASDAQ Composite continues as the single best indicator of general market direction, its significantly greater number of declining vs rising stocks compared to the S&P 500 is a worry.

Conclusion

September could be a difficult month, which may not improve significantly for two years. Please convince me I am wrong.

 

 

 

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Headlines Excite, Dictate, or Respond, not Inform - Weekly Blog # 647

 

Mike Lipper’s Monday Morning Musings

Headlines Excite, Dictate, or Respond, not Inform

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

As has been previously expressed, investment markets have entered an emotional trading phase. The combination of a US election, COVID-19, a new justice for the Supreme Court, and military accidents, primes the next four months for active trading and makes it inhospitable for long-term investing.

Even when the source is a generally respected, media headlines can be misleading. The wording of headlines is often not the choice or responsibility of the author or the assignment editor, but of a very busy headline editor quick to read, but not as familiar with the topic as others.  Each person that touches an element of the news views it through the lens of their own biases. In the current emotional period it is not unusual to see political bias in each of the news elements, including the headlines. This misdirects the audience and raises questions regarding the utility of the news elements.

In The Wall Street Journal weekend edition there is a headline “Stocks Fall for Third Straight Week”, which  makes it sound like we’ve entered a bear market. (That could please some reporters/editors who have different political views than the higher priced Editorial Board Members representing the official view of the publication.) When one reads the headline, the initial reaction is to expect a meaningful weekly decline, probably double digits. Nowhere in the article is it mentioned that the Dow Jones Industrial Average declined -0.03% for the week, or that the market went up three days during the week. The article neglected to mention something that is probably more bearish, that the Friday decline had a materially larger volume of shares traded. This may be the reason investors need professional analysts to review current market conditions.

One Day Difference, Distinctly Different Conclusions

Regular readers know that my first lens on the market is through the actions of the mutual fund professionals. Historically I have relied on fund performance for the five trading days ended Thursday. I do this for two reasons: 

1. I used to hire good people from the “back offices” of fund groups and their custodians, where I learned of the natural pressure to quickly finish computations before leaving for the weekend on Friday. Consequently, the Friday calculations were generally not of the same quality as Thursday. 
2. In addition, when stock specialists set transaction prices there is a natural tendency to reduce capital exposures over the weekend.

For the week ended Thursday, US Diversified Equity Funds (weighted by performance) averaged a gain of +0.98%. However, that is not the full story. Of the eighteen included investment objectives, only one was down for the week, Large-Cap Growth Funds -0.13%. The performance of these Large-Cap Growth portfolios has been dominated by well-known tech companies. To understand the impact of the media’s focus, look at the year to date numbers, where the US Diversified Equity macro group gained +4.71%. Performance was driven by the Large-Cap Growth Fund average return of +20.24%. However, that was not the critical number in understanding the impact of the markets, where the median fund was down -3.18%. (The median is the midpoint of the performance array.) This is significant because if one adds up all the money invested in Large Cap Growth funds plus the money invested in S&P 500 Index funds, it represents only 36.9% of the money invested in the US Diversified Equity group. Thus, it is of interest, but is not a full measure of the performance of the market. The extraordinary gain from the March bottom is not so large that a major overall correction is warranted, a view contrary to one you’d get from reading financial columns this weekend. Another thing not credited is the downward selling pressure exerted on some of the best performing stocks in order to fund the purchase of 17 IPOs which began trading thus week.

A Very Bullish View

A large US brokerage firm believes the initial impact of the Coronavirus began a new market cycle, with profit margins expanding into 2021. They could be correct in the absence of any new negatives appearing, although my own view is that they could be a year early.

Portfolio Management Views

1. At some point in long-term portfolios there is a danger that every single position does well. This is dangerous because when the inevitable market decline happens, almost all the positions are likely to decline. Some late blooming positions are a sign of a prudent manager who wants to own something going up in almost all market conditions.
2. By far the largest surprise in many portfolios is my belief that we are not in a permanent low interest rate environment. Since few people are looking for an explosion of interest rates, I am of the belief that good things don’t last forever.

Questions?

What surprises are on your worktable?       

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https://mikelipper.blogspot.com/2020/09/mike-lippers-monday-morning-musings-who.html

https://mikelipper.blogspot.com/2020/09/turning-point-or-bump-weekly-blog-645.html

https://mikelipper.blogspot.com/2020/08/caution-ahead-emotional-turns-likely.html

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Caution Ahead: Emotional Turns Likely - Elections and Coronavirus - Weekly Blog # 644

 

Mike Lipper’s Monday Morning Musings

Caution Ahead:

Emotional Turns Likely-Elections and Coronavirus

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

When the battlefield is quiet, expect to be attacked, is a lesson from the US Marine Corps. For bullish equity investors the low volume of August trading should signal a need to expect change. The most dangerous short-term change is one spurred on by emotions, rapidly bringing into action holders of excess cash or large equity holdings.

The calendar provides two events that could quickly galvanize emotional responses, the forthcoming US election and reports of successful vaccines/therapeutic COVID-19 treatments. Both could mobilize a large amount of almost instant trading from thrilled and disappointed investors. Based on a lifelong study of turning points, I suggest caution on the part of investors who believe in rusty or non-existent trading skills. Furthermore, very soon after the announcement a counter trend could appear, reducing the size of the initial pop and in some cases completely reversing it. As more information becomes available, the implications of the announced event will often become clearer. Even if further information reinforces the initial announcement, the length of time varies before complete utilization becomes evident. Thus, investors will have time to calmly adjust their holdings. 

Profitable courses of action build on some factors present before the headline event, while others will have little to no future impact. Some will advise you of the critical present factors supporting the future event, I am not so privileged. All I can do is briefly list some of the factors that might support the trends post the announcement, including the subsequent reversal moves:

• The biggest investment news of the week was the changing of the components of the Dow Jones Industrial Average (DJIA) and the reweighting of Apple*. The current producer of this most senior of US stock indices is S&P Indices, owned by Standard & Poor’s, who consults with some of the editors of The Wall Street Journal when making changes. On Monday they will delete Exxon Mobil, Pfizer, and Raytheon Technology, adding Sales Force, AMGEN, and Honeywell. In addition, on the same day the weight of Apple in the index will be reduced due to Apple’s four for one stock split. It will be replaced as the company with the heaviest weight in the index by United Health.

Because of the dominance of Dow Jones through its wires and publications, most investors tend to believe that the DJIA measures the US stock market. That a thirty-stock market price weighted index is “the market” with its’ 30 stocks and not the S&P 500, the Russell 3000 or the Wilshire, with its original 5000 stocks, shows the power of the media. Clearly, global indices have even more components. Nevertheless, the DJIA has done a reasonable job of tracking high-priced US stocks. Part of its success is due to dropping components when their outlook appears to be slowing. (Some components comeback into the index after a large merger.)

While most market followers will continue to use the DJIA as a market measure, I will not for the next twelve months. While statisticians will link the new components and the reduced weight of Apple, I believe they have created a new measure. After one year I will see the level of correlation with the S&P 500 and if the gap is close, I will return to using it as a measure. Once again, the editors may have done a good job of changing the components to represent our economy. Over the more than one hundred years of its existence, they have done a good job of switching the emphasis from consumer products, to industrials, to tech and then to high-tech.

(*) Owned in personal accounts

• Record high prices achieved this week for both the S&P 500 and the NASDAQ Composite confirms the view that the American Association of Individual Investors (AAII) sample survey of market direction for the next six months is a contrarian  indicator. For the first time in many weeks the leading bearish prediction fell below an extreme reading of 40%. 
• 79% of the WSJ’s weekly prices rose. This may reflect some shortages, but it also reflects merchants trying to increase prices to make up for forgone profits. Despite many learned economists being quite sanguine on inflation, I expect the Fed to get and exceed its desired 2% inflation target.
• Unfortunately, I expect layoffs will rise for a while. The Russell 2000’s second quarter estimated revenues dropped -19%, with earnings dropping -99.1 %. This indicates to me that smaller companies have kept their staffs to preserve their hard to get employees. So far, third quarter revenues have not risen much. There is a good chance that instead of preserving the work force the focus will shift to preserving the firm. I suspect private firm closings indicate a similar trend.
• The bond market is moving contrary to the stock market. Of thirty-one fixed income mutual funds investment objectives, only twelve gained for the week and they were equity tinged high-yield or pro inflation vehicles. The maturity yield curve tightened, with maturities of more than two years rising.
• There may be more longevity to the current market than appears. Typically, markets don’t peak until they exhaust all available cash and there is a lot of cash on the sidelines today. In addition, there is a lot of capacity to increase margin borrowing.  Remember, margin can be used to support short sales, as well as the more popular long purchases.

Working Conclusions:

• Trading oriented accounts should be prepared to make lots of small moves and be willing to reverse direction when appropriate.
• Capital appreciation accounts should look for bargains by being contrary.
• Capital preservation accounts need to recast their portfolio in one or more other currencies to determine their risk of only evaluating their accounts in dollars. European investments may look attractive for “value” oriented accounts and Asian investments could be attractive for long-term growth investors. Multi-generational investors should develop an understanding of the long-term outlook for selected investments in Africa and the Middle East.

Share your reactions and thoughts with us. 

     

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https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings_23.html

https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/08/rotating-leadership-likely-on-horizon.html

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